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Loans Guidebook


Loans are a fundamental part of everyone's life, whether you are a student seeking to learn, a newly-wed couple wanting to set up home or an entrepreneur seeking equity to help set up a business.

This guidebook provides an online resource that:

A quick overview

Your options for obtaining loans or other forms of finance revolve primarily around the following questions:

Generally, it is easier and cheaper to find a loan if you are prepared to:

How much risk are you prepared to take?

The main choice here is usually between secured and unsecured loans. For secured loans, you take more risk in order to get a lower APR (interest rate). You provide an asset (eg: your house) as a guarantee, but if you fail to keep up repayments, the lender can take possession of and sell your house to get their money back. The amount of money you can borrow on secured loans is usually limited by the value of the assets you have to secure those loans with (eg: the value of your house).

For unsecured loans you don't provide any guarantee, so there is more risk for the lender and less for you - but you still have some risk because you have to pay the loan back, and lenders can still take some action against you to recover their money. The amount of money you can borrow on unsecured loans is usually limited by your ability to repay (eg: the difference between your regular income and your regular outgoings).

Another choice, one that you may already have made, is whether your business is a limited company or partnership/sole trader. A limited liability company 'does what it says on the tin': it limits your liability (ie risk), though there are some directors' liabilities that you need to consider.

Another choice to minimise risk is between fixed-rate, variable-rate or capped loans. Fixed rate loans mean that you pay the same interest rate no matter what the general market rates are. The payments for variable rate loans can go up and down with the general market interest rates. Payments for capped loans vary with the market, but are guaranteed not to rise above a certain level.

Note: the term 'tracker' is often used to describe loans or mortgages. A tracker mortgage is one that varies by tracking a particular rate, such as the Bank of England Base Rate (plus a percentage). In essence, tracker loans are variable-rate loans.

How much long-term commitment can you make?

The choice here is between fixed or flexible loans. This is nothing to do with the rate of interest but describes the terms of the payment schedule: whether you have flexibility to overpay the loan to eventually settle it early. If you make a long term commitment then you lose flexibility and may be stuck with the loan for a long time, or may have to pay significant financial penalties if you decide to pay it off early.

How much cash do you need?

If you are stretching yourself, by taking the maximum mortgage available to you or by starting a business that requires a big investment, then there are various 'tweaks' that can be made to loans to help ease the pain of repayment in the early months or years. Common options are discounted loans, cashback schemes or payment holidays Discounted loans mean that the repayments are discounted for an initial period (this usually applies to a variable loan). A cashback scheme provides a similar discount, but gives you all the discount in the form of an initial extra cash payment to you. Payment holidays allow you, after an initial period of regular payment, to skip a limited number of monthly payments and add those payments to the loan.

How good are you at financial planning, forecasting etc.?

There are various options to consider, depending on your answer to this question, ranging from venture-capital through self-certification or bad credit loans. Venture capital involves obtaining funds from an individual or organisation looking to invest surplus funds in a new business. Venture capitalists don't charge you interest, but they do share the business risk and take a percentage of the shares in your company. At the other extreme, self-certification is a means for people who cannot prove a reliable income to obtain a mortgage. Finance companies offer bad credit loans when they are willing to take a risk in order to get a higher return. Self-certification and bad-credit loans are usually very expensive.

Who are you prepared to consult?

Whether you are looking for a mortgage or a loan, the key question when you go and see someone is whether they are independent or tied. Someone who is independent is usually paid by commission or a fee, but can advise you on the range of loans or mortgages available. Someone who is tied can only sell the products of one particular company; there may be a better product elsewhere that suits you better, though there can be genuine reasons for taking advice from a tied agent (eg: you have an established relationship with a bank manager who can take account of your track record and business judgment).

Finally...

Loans are not the only option for raising finance: you could obtain money through venture capital (already mentioned above), overdrafts, credit cards, hire purchase, endowments, personal contract plans, contract hire, rental, lease, shop/trade interest-free schemes and many others. You can also considering restructuring your finance (replacing existing loans with other loans on different repayment terms) or alternatives such as credit clubs.